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MMS Captured by Industry

Regulatory “capture” occurs when a government entity tasked with protecting the public’s interest instead protects the industry is it supposed to regulate. The latest example is the Interior Department’s Minerals Management Service. The MMS was created in 1982 to regulate the oil and gas industry and collect royalties on the resources extracted from federally leased land and waters.

The Washington Posthas an in-depth story detailing how the MMS’s cozy relationship with the offshore drilling industry contributed to the BP oil spill. MMS officials considered themselves “partners” with the industry, and the regulations MMS promulgated were often written by the industry itself. Because policymakers are generally more preoccupied with increasing spending and creating new bureaucracies rather than worrying about how existing bureaucracies are actually working, little attention was paid to the MMS’s activities.

As the Post explains, when policymakers did get involved with the MMS, it was typically to gin up more revenues for the government:

Few in positions of power in Washington paid close attention to MMS and the hard-to-understand world it was charged with regulating. When they did, it was often to pressure the agency to increase the money it earned from leases it sold and the production that followed. Over its 28-year history, MMS grew to become one the government’s largest revenue collectors, after the Internal Revenue Service.

Investigations by the Interior Department’s inspector general over the past several years uncovered a story so sordid that it could have passed for a television soap opera:

Some industry officials built relationships that extended beyond the office. One MMS employee told the agents that she had sex with two oilmen who worked with the program. When IG agents asked whether she had sex with other industry officials, she asked if they had any e-mails to refresh her memory.

“I did date people,” she told them.

One Shell official e-mailed two female MMS employees to invite them to stay with him during a retreat in Keystone, Colo., a resort town in the Rockies. “Don’t worry about bringing a thing except yourselves,” he wrote. “Nobody will say a thing about you being here for the night. As far as I’m concerned, you were in a hotel.”

One of the women replied: “You are sooo wonderful. You know how much I totally adore you. I just want to see my best buddies for a few days and unwind in the hot tub.”

It gets worse:

The IG agents found that Lake Charles employees had taken industry-paid hunting and fishing trips. Two MMS officials and their families had traveled to Atlanta on a corporate jet to watch Louisiana State University play in the Peach Bowl. Thirteen employees had used government computers to receive or forward pornographic images or links to pornographic Web sites. An MMS inspector had written four evaluations of an offshore drilling company while negotiating for a job with the firm. Earlier, an inspector had pleaded guilty to making false statements about receiving gifts from industry.

One agency employee, who was dating an inspector, said her boyfriend told her that the time he and other inspectors spent on the platforms amounted to mini-vacations. She told the agents that they “eat like kings, they watch porn and they take naps.”

Regulatory capture is one of the many forms of government failure documented on this website. Policymakers never seem to worry about that in their continual calls to create new departments, agencies, commissions, boards, and other federal entities. When government regulations fail, policymakers almost always heap on more regulations. The government’s recent advances into the health care and financial services industries after its prior failures in those areas will likely lead only to further failures and more economic distortions down the road.

Gerald O’Driscoll points out that regulation also fails because the knowledge the regulators would need to possess “is dispersed throughout the industry and broader economy.” Centralizing that knowledge would mean central planning of the economy, which the Soviet Union proved does not work. O’Driscoll cites University of Chicago law professor Richard Epstein’s observation that we need simple rules for a complex world:

The complexity of rules is self-defeating, because that complexity requires more knowledge than can be acquired. Brazil has a simple rule for directors of failed banks: They are personally liable. That concentrates the mind of directors on reining in risk-taking by management more effectively than would creating a systemic-risk regulator.

The Obama administration and Congress propose more of the same failed approach to regulation. Instead they should heed Hayek, who observed that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”